CHAPTER 15

Fiscal Policy

Fiscal Who?Fisc- latin for bag or basketFiscal Policy – use of gov’t

spending and revenue collection (taxing) to influence the economy.

Gov’t spends nearly $250m every hour

Used to achieve: Economic growth Full employment Price stability

Federal Budget

Federal Budget – written document showing money expected to come in and where it will be spent.

Plan to pay the government’s expenditures for a year.

Fiscal Year – 12 month period of a budget (usually OCT 1-SEPT 30)

http://www.youtube.com/watch?v=_mfMG66LtVU&feature=related

Process of the Budget

President gained an upper hand in creating the federal budget in 1921 when the Office of Management and Budget (OMB) was created to formulate the budget

Congress clawed back some power in 1974 creating the Congressional Budget Office (CBO) as a non-partisan scorekeeper

Fiscal year starts on October 1 and proposed budget must be submitted no later than 1st Monday in February

When a President’s approval rating is high, or his party controls Congress, he is more likely to get more of his spending approved

http://www.kowaldesign.com/cgi/Budget.pl?estimates=111111

Fiscal Policy: Grow

Expansionary policies – attempt to increase demand and output Encourage growth by either increasing government spending and/or cutting taxes. Govt spending increases aggregate demand to higher prices,

higher supply hire more workers

http://www.youtube.com/watch?v=1qhJPqyJRo8&feature=related

Fiscal Policy: Slow

Contractionary Policies – decrease

output and demand to slow growth To prevent demand from exceeding supply Prevents inflation Govt spends less, slows down GPD

lower prices

TaxesGov’t can also use

taxes to influence economic growth and stability

Decrease (cut) in taxes puts more money in hands of business and consumers, encouraging them to spend and invest

Increase (raise) in taxes takes money from consumers and businesses encouraging them to spend and invest less

Realities of Fiscal PolicyFiscal policy is very

theoretical and can be clumsy and difficult at times Changes in spending usually take

a year to materialize Congress and president are

elected officials who want to create policies beneficial to those who vote for them

Different levels of gov’t have to work together to coordinate policy from national, state and local levels

Federal Reserve & Monetary Policy

Chapter 16

Monetary Policy

Named for the “minting of coins” and drawn from the Roman Goddess Moneta 200 years before the common era

Central government and commercial bank Regulator of banking industry

Monitors money supplyStabilizer of economyPrinter of money

Structure of the FED

Monetary Policy – actions the FED takes to influence the level of GDP and inflations

Board of Governors – oversees the Federal Reserve

7 members with staggered 14 yr termsAppt by the President, serve 1 termChair of the Board of Governors – appt

by Pres, approved by the Senate – serves a 4 yr term, renewable

FED Structure

Twelve District Banks

12 districts and central district banks 25 branches

Monitor and report economic and banking conditions

Member banks – national banks must join the FED

FAC – Federal Advisory Council – collect info and reports to the Board

1 member from each district

Federal Open Market Committee

Makes key decisions about interest rates

Decisions are announced to the public

Members come from the Board of Governors + 5 district bank Presidents

http://www.youtube.com/user/mjmfoodie#p/u/13/aMg3vrQ6keE

What is the FED?

Banker for the governmentBanker for member banksRegulator of banking industryTracker/ monitor of money

supplyStabilizer of economyPrinter of moneyOverseer mergers

Federal Reserve

Ben Bernanke

Baum’s Wonderful World

Dorothy: crusading Populist William Jennings Bryan

The Wiz: Central Banker “The Fed”

Emerald City: D.C.OZ: abbreviation for ouncesSilver “ruby” slippers: bimetallismYellow Brick Road: Gold StandardLion: cowardly Populist partyTin Man: Industrial WorkersScarecrow: Poor farmersTornado: Panic of 1893

Federal Reserve: the banker’s

bank

Banker for the U.S. gov’tSells, buys, transfers, currencyIssues currency and coinsCheck clearing – (p421)Supervises bank lendingDiscount rate – rate the Fed

charges for loans to commercial banks

Functions of the Fed

Fed monitors the reserves (cash) that banks keep

Enforce truth-in-lending lawsOversee bank-to-bank lending

Interest rates banks charge other banks is the federal funds rate

Reports on conditions of banks and their net worth or their investments

http://www.clevelandfed.org/About_Us/who_we_are/about_the_system/index.cfm http://www.pbs.org/wgbh/pages/frontline/meltdown/view/?utm_campaign=viewpage

&utm_medium=grid&utm_source=grid

“taking away the punch bowl just when the party gets started” ~William McChesney Martin

Factors Affecting Demand

What affects the demand for cash?

1. Cash on hand2. Interest Rates3. Price levels4. General level of

incomeTreasury Department

Monetary Policy Tools

*RRR*Money creation – putting

dollars into circulationYou take out a loan and put it

into a checking acct.Bank has to only keep a

certain amount (required reserve ratio) of your money on hand.

Bank lends out the remaining money.

How Money is Created

Acme bank has $10,000, RRR of 10% Thus, it holds $1,000 in reserves and loans the 0ther

$9,000A new deposit of $1,000 arrives

No change in the money supply Yet now bank holds $900 in excess of RRR (which is

$1,100)

Money Creation

Acme Bank will loan out this excess of $900 by just crediting another customer’s account

Thus there is $900 dollars of new money, not actually existing in supply (physically), but available to someone

ReservesMoney Multiplier

formula – 1/ RRR

Tells how much the money supply will increase after an initial cash deposit to the banking system

Everything in excess of required reserves is theoretically loaned out, thus creating new money

Reserve Requirements

Reducing the RR frees up money in local banks allowing them to make more loans

Increasing the RR tightens up the money supply because banks have less money to lend out.

RR up, money supply downRR down, money supply up

Discount RateDiscount rate – interest FED

charges on loans to financial institutions

Changes in the discount rate affect the prime rate (rate of interest banks charge their best customers)

Discount rate down – more money lent out, increased money supply

Discount rate up – less money lent out, decreased money supply

Open Market Operations

Most important tool used by the FED

Involves bond sales

Decrease the money supply – sells govt securities to dealers to take money out of circulation

Increase the money supply by buying gov’t securities to put money into circulationhttp://www.youtube.com/watch?v=L0hQfaxYU8k

http://www.youtube.com/user/mjmfoodie#p/u/12/HdZnOQp4SmU

Money Policy

Tight money policy Fed wants to reduce the money

supply, raise interest rates, spending slows down

Easy money policy Fed wants to expand or stimulate the

economy – increase money supply

http://www.frbsf.org/education/activities/chairman/index.html